The Hindu Business Line : Containing downside

We looked at three corrective phases over the past four years — January-July 2008, May-June 2006 and January-May 2004 — to look for clues in choosing funds in turbulent markets.

In the diversified equity pack, HSBC Equity, DSPML Top 100 Equity and HDFC Top 200 stood out for creditable performance in every one of these falls. They contained downsides better than the Nifty on at least two out of three occasions.

The spread across stocks (35-80) and sectors (15-20) helped these funds contain losses better than other funds with concentrated exposures. The funds have a predominantly large-cap bias and have, over a five-year period, delivered steady, rather than superior returns. Investments through the SIP route over a 3-5 year period may be considered in these funds.

In these turbulent markets, funds that invest in markets overseas have also stemmed the rot on returns even better than domestic diversified equity funds. This suggests that overseas investing, even if only in other emerging markets, may be a good risk-mitigating strategy for investors willing to take exposures.

Investors may have difficulty in taking a call on the fortunes of various international funds on offer. But a small portion of the portfolio may be allocated to these funds. Another good diversification move appears to be ‘gold’ funds, either through the ETF route or through funds such as DSPML World Gold Fund.

Theme funds focused on sectors such as power and infrastructure — the toast of investors in the entire bull-market — have fallen very sharply during the correction. With the underlying themes taking a bigger hit than the broad market, theme funds lost much more than the standard indices such as the Nifty or Sensex.

Even in the earlier 2006 correction, theme funds fared poorly compared to diversified funds. Given that the dynamic macro environment may call for quick switches between themes or sectors, fresh exposure to such funds may be avoided by risk-averse investors.

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